What’s So Great About Pay Transparency?

Employees respond positively to transparency around pay.

getty

Pay transparency is one of the hottest topics in business today. It is viewed as a way for employers to build trust with employees and boost engagement and productivity. Additionally, it’s seen as vital for closing the gender pay gap.

The term ‘pay transparency’ can be interpreted in different ways. For some employers, it simply means communicating pay practices to employees and explaining how pay is determined. For others, it literally means full transparency around the salary or salary ranges for every role.

Recent research into pay transparency by jobs board Talent.com found that 78% of job seekers in England believed that salary transparency is a good thing, with 74% arguing that it creates a fairer environment for both the worker and their colleagues.

Culture of openness

This view is shared by Michelle Cheng, talent director at British venture capital firm Notion Capital. “A company that embraces pay transparency conveys so much more than just the salary itself,” she argues. “It’s the subtext in treating everyone like an adult and establishing a culture of openness.”

She adds: “A company that’s happy to publish its salaries is more likely to compensate its people fairly, manage performance consistently and communicate on other matters clearly. Increasingly, top candidates are looking for companies that align with their personal values, so it’s no surprise they’re looking for companies that prize transparency.”

Cheng believes that pay transparency will help to advance diversity in both tech and leadership, saying: “It forces a frank conversation about the relative value of different types of work and sheds light on what behaviors and outcomes are rewarded at your company.”

So, what should leaders bear in mind if they’re looking to introduce pay transparency into their organization? “Implementing salary transparency should be the final step in a company compensation philosophy and benchmarking exercise,” advises Cheng. “Consider creating a rules-based framework or formula you can reference when people challenge your rationale – and they definitely will. For example, X% additional compensation for Y years of relevant work experience in a given salary band.”

Real-life experience

ComplyAdvantage, a London-based provider of anti-money laundering technology, began implementing a culture of pay transparency in 2020. Its first step was to be more overt about the annual pay cycle and related processes – making sure that everyone in the workforce knew that the organization took a common approach to deciding pay.

Since then, it has created a global job framework, as well as pay ranges, and invested time in building collateral to communicate its overall approach to compensation. It is moving toward advertising all roles with salaries outlined upfront and it ensures that its compensation policies and practices are visible to all its people.

“We think salary transparency is the best way to instill confidence in our people that they are paid fairly for the work they do and competitively in the market,” explains Amanda Ward, vice-president of people. “We want to avoid any misconceptions and ensure from day one people understand how their compensation is determined and, most importantly for them, when and how they can influence it.”

ComplyAdvantage has seen an uplift in engagement as result of its commitment to pay transparency. In October 2022, an employee survey revealed that 70% of its team thought their pay was fair relative to the market while 80% felt their pay was fairly decided. “As we continue implementing our pay transparency initiatives, we hope to see this number rise further in the future,” says Ward.

Downsides of pay transparency

But are there some potential downsides to pay transparency that leaders should consider?

“In my view, the downsides come more from what the transparency reveals rather than from the pure fact of wages becoming or being transparent,” says Tomasz Tadeusz Obloj, associate professor of strategy at the Kelley School of Business at Indiana University in the U.S. “Availability of wage information triggers social comparisons in organizations and those can be costly in terms of decreasing morale, increasing mobility and politicking, and so on. But the potential costs will differ depending on what type of transparency we are talking about.”

A challenge for managers, says Obloj, is that they have to justify wage differentials and make adjustments that rectify potentially discriminatory rewards from the past. “One potentially efficient way of overcoming concerns about transparency is making sure that what transparency reveals is fair,” he says. “Of course, it is easier said than done but making sure that the link between performance and pay, or job position and pay, is uncontaminated by discriminatory practices is a first very important step.”

Overall, however, Obloj is positive about the impact of pay transparency, believing that it has beneficial outcomes for society, including helping to narrow the gender pay gap. “In general, it seems that transparency is instrumental in decreasing a range of inequities in the wage allocation process,” he says. “While the costs may be present, such as increased employee mobility, transparency is fast becoming a reality through bottom-up processes where employees reveal salaries by themselves.”

Ultimately, Obloj concludes, “organizations and legislators have much to gain if they take a stand early on instead of waiting for people to find other ways of ensuring that they are getting fair treatment from their employers”.